It appears that stock investors are not discouraged by the highest inflation in decades or the resulting increase in bond yields, according to an article in Bloomberg. As analysts struggle to determine why the S&P 500 Index has had several recent rallies in the face of tightening by the Fed, war in Europe, and soaring Treasury rates, one theory is that many investors are hanging onto equities when prices spiral, and that’s proving to be an efficient strategy.
Stocks have an advantage over bonds when inflation rises, because they’re connected to companies who can adjust pricing. Bonds can’t do that. So as the S&P 500 rallies, the rout in U.S. Treasuries continues, especially after Fed Chair Jerome Powell wouldn’t rule out raising rates by half a point in May, and James Bullard, president of the Federal Reserve Bank of St. Louis, told Bloomberg that “monetary policy needs to be tightened quickly in order to halt inflation,” calling for a 3% raise this year. Based on those statements, the 50-basis-point raise might not be an empty threat–but the stock market seems to be saying that not even these higher rates are going to break the economy.
Other positive forces could be driving the optimistic outlook, such as solid U.S. manufacturing, a robust jobs market, and the lowering of pandemic restrictions. Additionally, corporate America has proved resilient after early pandemic losses, with 2022 expected to be another year of profit expansions on top of record profits in 2021. In fact, analysts have raised the 2022 estimates by 1% to $225.70 a share, reports Bloomberg.
And while there are some who portend of a recession, there’s not much evidence that a recession will come to pass this year, with Chris Weston of Pepperstone Financial putting its likelihood at less than 20%. He believes that people are buying stocks because they view the Fed’s tightening in a positive light. “The fact is a Fed bringing out the big guns in May and using forward guidance to set the scene ahead of this may be welcomed by the equity market — they’ve weighed up the outlook and feel a credible Fed is a strong Fed, and higher rates are better than entrenched inflation,” Weston is quoted in the article’s conclusion.
